Silver Lining?

The big Econo-boys are weighing in on the state of the economy, and providing a consensus opinion on the coming economic recovery. According to the Wall Street Journal:

Economists in the latest Wall Street Journal forecasting survey expect the recession to end in September, though most say it won’t be until the second half of 2010 that the economy recovers enough to bring down unemployment.

Gross domestic product was predicted to contract in the first and second quarters of this year by 5.0% and 1.8%, respectively, on a seasonally adjusted annualized rate. A return to growth — a modest 0.4% — isn’t expected until the third quarter. In the fourth quarter of 2008, the most recent period for which data are available, the economy contracted 6.3%.

The outlook for employment isn’t quite as good, though.

Just 12% of the economists expect the unemployment rate to fall some time this year. More than a third of respondents expect the jobless rate to peak in the first half of 2010, while about half don’t see unemployment declining until the second half of 2010. By December of this year, the economists on average expect the unemployment rate to reach 9.5%, up from the 8.5% reported for March. They do see the rate of decline slowing, forecasting 2.6 million job losses in the next 12 months, compared with the 4.8 million jobs lost in the previous period.

I’m a bit more negative on the above. As of today, weekly initial unemployment claims are still at 650,000 per week. If that keeps up, we’ll continue to see 0.5% increases in unemployment on a monthly basis. We might be at 9% by next month, nevermind December.

I’m also concerned about the implications of the rabid expansion of the monetary base over the last 7 months, during which it essentially doubled. If that impacts signifigantly on inflation by the end of the year, then we’ll be between a rock and a hard place with a weak economy, and signifigant inflation. Any Fed moves to contract the monetary base will crater the economy, in much the same way that Paul Volcker’s Fed did in causing the back to back recession of 1981-1982.

There are still treacherous shoals to navigate for the economy before I begin to get bullish on economic growth again.

14 Responses to Silver Lining?

One thing I notice about this economy is this: people are NOT spending money. They are not buying cars, they are not buying houses, they are not buying big ticket items. They are spending their money on what I call “survival materials” – i.e., food and shelter. And now, even Walmart is seeing a downturn in spending.

When people don’t spend, jobs are lost. When jobs are lost, people don’t spend. It is as simple as that. And The Clown’s™ Spendulous Package has done nothing to change that. The hoax of his “Middle Class Tax Cut” put about $20 a month into people’s pockets, which they are not going to spend except on those “survival materials.”

So watch as unemployment continues to go up and up. And the economy goes down and down. And right now I see nothing on the horizon that changes that.

I believe that the current crisis has been less about Wall Street or even government than about our hyper-consumerist economy built on debt and trade deficits (cheap foreign goods). This literally creates a situation that if China wanted to slowly dump its stake in US debt the dollar would weaken so much that foreign concerns could buy up ownership in most American businesses and corporations. We have made ourselves vulnerable to that kind of ‘take over.’

I’m glad people are saving. I’m glad people are out of the “gimme, gimme, consume, consume, consume” mentality. We can not invest in a true productive base without a savings base. People need to save and pay off debt now that the illusion that stock wealth and property wealth were as good as in the bank is gone. We need to shift to a sustainable economy, and a culture that does not want “something for nothing” (be it government handouts, or a belief that money in a stock fund is easy 10% or so year gains). Quick consumption-driven growth would probably be counter productive. Our problem, though, is cultural, even spiritual.

And, one thing I agree with McQ on is the concern about inflation. Obama’s taking a gamble here. If the dollar loses value due to all of this (a collapse of sorts is not impossible) then as soon as the stimulus starts to “work” it will be stymied by inflation and a bout of deep stagflation. That’s the danger. It’s not a sure thing (no one really knows what will happen or what will work), but it’s a danger.

Alan Reynolds had a column up the other day arguing the $145 oil started the recession and that it was a world wide phenomena. I believe that is true and the housing decline followed from that and then the whole thing just fed on itself.

We hear a lot about China dumping bonds, but we do not hear about how much that would hurt China. First, the value of their remaining bonds would go down. Second, it would make their exports to the US far less desirable and hurt their own economy. I doubt the Chinese rulers want to take those chances.

I agree people are saving more, as they should. We now have a declining wealth effect rather than market and housing bubbles which made everyone feel better off than they actually were. This will also be a long term trend rather than a short, recession like, spurt in the savings rate. Much like those who lived through the depression remained cautious for their whole lives, this recession will have a longer lived impact than the Volcker recessions of the early 80’s designed to knock out inflation. That brings us to the point on inflation. When the economy turns, the Fed will have to move quickly to soak up excess money. If they are too slow, inflation will gallop off on us. But, if they are on target, we will end up with Volcker like recessions. The second part of that problem will be the stimulus spending and the out sized budgets and budget deficits. We will have fiscal policy in direct opposition to monetary policy. If Congress were smart, they would pull back significantly on the spending now before it gets ingrained in the citizenry. But, they won’t because none of this is really about stimulus. Just for an example, if the projected national debt reaches $20 trillion. the carrying cost (at 5%) would be $1 trillion annually. That is close to 1/3 of today’s budget. Now couple that with the entitlement tsunami and we have a real mess. The government will be unable to inflate their way out of debt because too many people will be on fixed incomes and will vote their pocketbooks.

The real problem is we are now a Fram commercial: “pay me now or pay me later”. The government is opting for later when it will be much more painful.

I think it’s self-evident that high oil prices started the recession — it was the pin that pricked the property bubble. The Pentagon war gamed ‘economic war’ and I guess China came out pretty good. China could gradually shift from dollars and US debt, and as that would cause a decline in value of the dollar, they could buy up US assets and gain greater control of the private sector of the US economy. Over time, the US economy could be ‘internationalized’ in that way, which would be, well, interesting.

So I don’t think China will “dump” bonds and currency, but I think they’ll gradually reposition themselves to benefit China in relation to the US, and gain more influence on US policy. You’re right about inflation, I think. The stimulus will get a short term gain — which may help the Democrats politically in 2010 and even 2012 — but if there aren’t major cuts as soon as the economy starts to improve then we’ll be looking at a devalued dollar (inflation).

I feel like I did back at the start of the Iraq war, when people were praising the easy victory and poo-pooing claims that creating democracy would be impossible and that the war would be recognized as a mistake. The “now” was good enough to persuade people not to worry about what could go wrong later. Reality bites, and few now defend going to war in Iraq. The stimulus now seems to be ‘working’ in that economists claim an end to the recession is in site. But the danger of immense debt — nearing WWII levels in comparison to GDP — is huge. I hope the stimulus works, but it might ulimately be seen as a fiasco — an economic equivalent to the Iraq war.

If China buys less of our debt, then their leverage over us will go down not up. Unless other factors come into play.

If China stops buying our debt, they can no longer sterilize their trade surpluses and this will lead to other problems, unless they allow their currency to float. If they do that, then most likely, the RMB would appreciate some more. (disclosure: I have some RMB accounts for this reason.)

Inflation would be an interesting political issue. I don’t think voters would blame Bush for it. If there is a double dip recession because they have to kill inflation, it also would be for Obama’s account. Anyone think Keynesism is going to work? I mean, the stimulus is probably just starting right as some economists says we are plateauing…if Obama were smart, he would reduce the stimulus maybe during summer, if things look good – it would actually increase confidence “hey we need less!”

I’m more concerned about the damage the Obama-Pelosi Red Brigade is doing than the immediate performance of the economy. The economy should and will recover, but the damage these people do will be long-lasting. If we wind up in two years with the Feds eating 35% of GDP, future economic growth will be pretty grim, with wealth creators being smothered.

Note to Erb: you’re responding to a post by Dale Franks, not McQ. I know, “names,” “labels,” you’re not into them.

I also see that you are using the codeword “sustainable.” Pretty funny. And “Our problem” is you, Erb. A completely non-productive ward of the state who injects poison into the minds of young kids who fall into your hands vulnerable and already badly educated.

Recessions, by the way, help break bad habits and restore good ones, which is why a recession can make an economy stronger. But no one needs an empty husk like you talking about the nation’s spiritual malaise, when you’re for certain a minor source of it.

Think about that blog I proposed elsewhere. You’ll be allowed to comment, to your heart’s content.

I don’t agree with the assessment that growth in the economy will be positive in the third quarter. I base this on the simple things I see in my everyday life, not reams of charts and studies. Besides, when has a consensus of economists been right on anything?

The people I talk to are nervous as I’ve ever seen them. These are the people who produce, work hard, and provide good lives for themselves and their families. They, we, are cutting any non-essential expenses. They see what the government is doing and proposing. They know they will have to pay higher taxes, more fees, more in health insurance, you name it. They also see the amount of money the government is spending and the amount of debt the government is piling up. They also see their friends and relatives getting laid off and worry about their own jobs. This leads to a long-term change in behavior for “producers”. (The “looters” never change their behavior.)

The “economists” can debate about money supply, currency devaluation, etc. , which is all well and good. But I think they forget about the daily life and viewpoint of “us”, the regular person.

The third quarter would be about where a normal recession would end, even a deep one. To my eye, the markets looked poised to move toward recovery — i.e., renewed investing suggesting optimism about growth and therefore stirring it — in January. They had found a stable bottom and seemed to be looking warily but with some confidence at a decent future economy. Then Obama started in with, first, his intense negativity, suggesting that catastrophe loomed (and it does, but he is it) unless the Congress passed the huge political payoff that it was calling a “stimulus” package. Getting that, he made immediate moves to place further burdens on wealth creation and formulate a huge budget. The “great moment in history” was neither the first black president nor the greatest financial peril since the Depression; it was a Congress controlled by the far Left and ready to move toward European level socialism like a heist team taking down a fat bank.

That has most certainly slowed the economy from moving into recovery, but I believe the country will throw that off and get busy, even as it chafes under the heavy yoke of its new socialist masters.

The top three holders of US debt are China, Japan, and the UK. All three ( along with the rest of the world) are having economic difficulties and do not have the surpluses to buy US debt anymore. At the same time, Obama plans to sell a heckuva lot more debt. Who is going to buy this debt? The UK is already out, and can’t even sell all of its own new debt.

If anything, the yield on US debt will increase, as will interest rates in general.

That is my opinion and I am sticking to it.

I read an interesting piece the other day, where some economist pointed out that it really doesn’t matter how much money you print if you bury it in a hole. The problems only start when you start circulating it so that gives a few months delay before banks start lending again, the stimulus starts trickling down, and inflation really kicks in. Collectibles will once again be in demand, as they were in the Carter years.

To paraphrase an old saying, save your confederate money boys because although the South may not rise again, the price of antiques will.

If the dollar collapses or severely declines in value (and China could slowly draw it down by diversifying its sales and investment to make the US relatively less important to their economic situation), then yes, Obama gets the blame, not Bush. The point about money circulating is valid for inflation caused by increased money in circulation. I’m more concerned about inflation due to a declining value of the dollar on world markets.

China doesn’t have a choice about whether or not to buy Treasuries unless they are willing to let their exchange rate float vs. the USD. And that would severely impact their ability to export goods, which would result in massive increases in unemployment, which would lead to serious civil unrest.

All this worrying about the Chinese buying the U.S. sounds strangely familiar.

Our economy will not recover until it attracts capital from the private sector. Like it or not, rich guys will not invest unless they see that the government will not take the money they earn.

Step one is to reduce entitlements, not increase them. I would start with the earned income tax credit. Someone who is paying zero income tax is not entitled to part of our return. If you haven’t already done it, reduce your withholding to 90% of what you paid this year. Make a lump sum adjustment in December to avoid a penalty. There is no reason to float the government a free loan every year.

Step two, cut capital gains, corporate tax and the top marginal rates. These cuts will spur investment, create new jobs and reverse our unemployment spiral. This always results in increased government revenue from adding new taxpayers to the rolls while reducing the costs of unemployment. Kennedy did it; Reagan and Bush did, too. It works.

Step three – incentivize the largest sector of our statutory budget – education. On a performance basis, educational products are getting worse while costs increase a double the rate of inflation. My experience as an employer is that the basic education in our public schools is getting worse, not better. I paid some of my employee’s night school courses to bring their communication and technical skills up to an entry level. At half the cost, Catholic schools turns out a much better product (and I’m an Episcopalian).

The government should stop bailing out businesses. Some are supposed to fail. I also do not believe in government stimulus. If they want to inject cash into the economy, stop taking so much out of it.

Look, there’s no way on earth inflation is about to become a problem in the middle of a massive devaluing of assets. You’ve always seemed reasonably smart on economics to me, Dale. How are you missing this?

Seriously, dude. America’s net worth has lost four trillion dollars in the last year. And you’re worried about inflation? All the liquidity being pumped by the Fed is just barely keeping even.

You’re probably right that the worst is not over, though. Until the housing market bottoms, it’s hard to imagine anything that might possibly work. (although some things, like a … spending freeze.. could massively f*ck us over.. thank god the adults are in charge…)